From first-time home buyers to seasoned real estate deal-makers, investors of all experience levels can now turn the bubble mentality inside out. You'll transform it into a protective force field and even a crystal ball, allowing you to accurately forecast your real estate future.

Part One

The Confident Contrarian

When everyone else is racing for the exits,that's when you should be calmlywalking through the entrance.

Although I'm most often referred to as the world's first real estate 'artist,' I'm also considered a realist and an optimist, yet always an opportunist. (That's quite a few 'ists.')

To succeed in real estate, it's unwise to approach your craft as only a flipper, wholesaler, retailer, builder, renovator, contractor, short seller, or any of the other labels you might stick on yourself. You must consider yourself a real estate opportunist who is educated and ready to profit in any market, using many applications, under any condition.

Burst This! is designed to help you understand all the roles you must play as an opportunist.

As I write this from my tree-house office, I'm carving out a new niche as the 'green giant,' the guy who creates oceanfront masterpieces that combine opulent luxury and environmental responsibility, and in Chapter 1, you'll see how this is just as much a part of the American Dream as the charming three-bedroom, two-bath with the nice lawn and picket fence. More important, you'll see how the American Dream safeguards two crucial market segments and how you can profit from them.

In Chapter 2, I share with you how you can boost your own risk tolerance—how you can gain the confidence you'll need to take prudent risks in any kind of market. This is the realist talking. Yet to do what I do, I have to live in my own reality, not the media's or anyone else's. That's the optimistic and opportunistic side—something you'll read more about in Chapter 3—which will keep you ahead of the curve, not looking at its backside.

In Chapter 4, we examine six historical cycles of the real estate market in detail. Don't worry: I won't bury you in charts and graphs and numbers, but I will give you the unvarnished truth about recurring ups and downs. I will use real estate's past to help you predict your real estate future.

Let's start with a simple analogy, which you should keep in mind as you read the next few chapters: Think of certain segments of the real estate market as blue-chip investments. 'Blue chip' stocks are those offered by companies that are considered safe places to put your money—leaders in their class that are in healthy financial shape. Much real estate is a Pfizer, a Coca-Cola, a Cisco. It's a Dow Chemical, Apple, Microsoft, General Electric, Bank of America, or Google.

What defines a blue chip is that it makes steady money for investors over time. In a single month, or even a single year, prices may dip and investors may sustain short-term losses, but if that happens, it reflects undervaluation, not depreciation. There's a big difference in the definition here. In other words, for a period of time, a blue chip can be sold for less than it's been worth historically: it's a bargain because the investment is backed by a still-strong entity that remains profitable and the best of breed in its class.

For the confident contrarian, recognizing the aberration represents a significant opportunity.

As one example, consider Microsoft's antitrust issues of 2000–2001. Imagine that someone you knew well, someone with a sharp financial mind and your best interests at heart, had come to you in December of 2000 and told you Microsoft had dropped to twenty dollars a share, and that it historically had been more than double that. This person said that although it might not get up to fifty dollars again, it surely was undervalued now. This low price was counter to its historical performance. Wouldn't you have wanted to buy some shares? Maybe a lot of them? Using your backward-looking crystal ball, I bet you would.

You could have bought that stock, closed your eyes and gone Rip Van Winkle, then woken up a little less than three years later (not even the twenty years old Rip spent snoozing under his tree), and your stock would have been worth more than thirty dollars a share.

A more recent example would be Warren Buffett, the richest man in the world at this writing, taking a large stake in General Electric and Goldman Sachs—once again taking a contrarian's approach, investing in best of breed while they were suffering from declining share price in the face of much fear. Buffett follows and profits from a simple rule of buying: 'Be fearful when others are greedy, and be greedy when others are fearful.'

'Be fearful when others are greedy' refers to occasions of overvaluation, which occur even among the blue chips. Who can forget the dot-com bubble, when many investors' excitement got them so jacked up that they were willing to pay obscene prices for anything even remotely related to the Internet? The blue chips that were developing products and services for the World Wide Web got a price bump from that run-up, too. And when the correction occurred, when investors realized the emperor wasn't wearing any clothes and started unloading the stocks that were overvalued, the blue chips' prices normalized, too. However, those prices didn't bottom out and go to zero like so many of the dot-com stocks (the ones that had no earnings but once boasted a high-share price just because of the '.com' in the company name). Those investors who got out before the bubble burst—who sold before the market could no longer sustain inflated prices and share prices dropped like a stone—made out like bandits. The same held true during the recent market correction. So many quality companies were devalued just as a matter of course, not based on any real depreciation. Contrarians like Buffett stepped in to feast.

Throughout this book, when I talk about a 'bubble,' I'm referring to any market condition where people are excited about a commodity and therefore paying more for it than what it's worth. Of course, that 'worth' can be hard to figure. In a bull market, demand (and greed) keeps driving prices up, up, up. In a bear market, flagging demand (and mostly fear) drives prices down. It takes a cool head, a commitment to making your own markets, a realistic review of historical values, and an ability to shut out the noisemakers (the pundits and panderers) to avoid getting caught in the greed and fear cycles of the masses.

Yes, you need to protect yourself against market bubbles, and I'll be helping you do that in this first part of the book. Yet there's something incredibly important you need to realize right now: The bubble you most need to protect against is the one you might create on your own by overpaying, overextending, overleveraging, overimproving, underimproving, getting overexcited, or not marketing properly. Burst This! will definitely help you pay the right price for the appropriate number of properties, using responsible debt without introducing damaging emotion, while insuring you improve for maximum appeal. Most important, it will help you market like nobody else. Although there's plenty to be learned by studying the trends generated by the emotional reactions of the majority of investors (in general, what not to do), the most important trend for you to follow is your ability to make markets while making the most of any situation.

Frank McKinney is a two-time international bestselling author, philanthropist, and extreme risk taker best known for his unprecedented success as a real-estate "artist" and visionary. The world's wealthiest clamor for McKinney's masterpieces, with each multimillion-dollar estate inspired by exotic locales and infused with vivid imagination. McKinney's gift and passion for extraordinary homes extends to his role as the director of Caring House Project Foundation, a nonprofit organization he founded in 1998, that provides a self-sustaining existence for some of the most desperately poor and homeless families around the world. The foundation develops entire communities, complete with homes, medical clinics, orphanages, schools, churches, clean water, and agricultural assets. McKinney lives with his wife Nilsa and their daughter, Laura, in Delray Beach, Florida.